Settlement Agreements and Without Prejudice discussions - A major trap for the unwary employer

This article has been updated in May 2010 - please refer to the note at the end of this article

Employers and employees who have a dispute about actual or potential termination of employment often commence ‘without prejudice’ negotiations with a view to reaching a negotiated settlement either with or without employment lawyers. Most people understand that such discussions cannot be relied on in a later court or employment tribunal claim. This is because such discussions are ‘privileged’ so can’t be used in a court or tribunal or even referred to. The privilege is given to such discussions by the courts so as to allow parties to negotiate openly without fearing that the discussions will be used against them if the negotiations fail. Incidentally, such discussions are either ‘without prejudice’ or they are not – so it does not matter if, for example, a letter is not headed ‘without prejudice’, as if it is a genuine attempt to reach settlement of a dispute or a stage in such an attempt the letter will be without prejudice.

‘Without Prejudice’ discussions are often about settlement agreements. These came into existence in 1993. They are a well-established tool, prepared by employment solicitors and then used by employers to ensure that a departing employee cannot later bring a claim against the Company. Historically they were used as an offer to troublesome employees as a way to leave the Company quickly and without the need for disciplinary proceedings and/or performance management. Both sides often benefit as the Company has the certainty that once the settlement agreement is completed the employee has no further redress and the employee leaves quickly, with a package and a blemish free disciplinary record.

However, the Employment Appeal Tribunal has recently decided that this enabled Company’s to avoid dealing with issues that were contrary to public policy. As a result they have cast a huge shadow over when companies can offer settlement agreements.

By way of illustration: Mrs X is being sexually discriminated against by her boss Mr Y – the top salesman in the Company. Mrs X raises a grievance. There have been concerns about Mrs X’s performance anyway but nothing has been done about them and anyway Mr Y is a star performer and they don’t wish to lose him. The Company therefore decide that, rather than spending a great deal of management time dealing with issues that will be disruptive to all, they will offer Mrs X a settlement agreement to leave. Mrs X has made it clear that she no longer feels that she can work with Mr Y and there are no alternatives to offer her in the Company so it all seems pretty straightforward.

However, it is not. In the case of BNP Paribas –v- Mezzotero, Mrs Mezzotero brought a grievance about her treatment after her return from maternity leave. The employer called her into a room and said that the meeting was ‘without prejudice’ and independent of the formal grievance. The Employment Appeal Tribunal found that by not dealing with Ms Mezzotero’s grievance and instead by offering her a settlement agreement, the Company was acting contrary to public policy, in that discrimination should be addressed. By offering her a settlement agreement BNP Paribas were in effect saying ‘we have already made up our minds that you are to go regardless’. This fundamentally breached the trust and confidence that Ms Mezzotero had in her employer and gave her a very strong constructive unfair dismissal claim (coupled with the potential sex discrimination claim that she may already have had which attracts unlimited compensation).

In the case of Mezzotero the court held that for the “without prejudice” rule to apply there must be a dispute between the parties and the written or oral communications to which the rule is said to attach must be made for the purpose of a genuine attempt to compromise it. The Appeal Tribunal held that in Ms Mezzotero’s case there was no existing dispute between the parties as to termination, which the employer’s remarks were a genuine attempt to compromise. Accordingly the “without prejudice” rule did not apply to prevent statements made at the meeting being admissible in evidence before the Tribunal.

There is also a very practical problem with this approach. If the exiting employee has restrictive covenants carefully designed to protect the interests of the Company should they leave, these will be rendered useless in the face of a constructive unfair dismissal claim. Constructive unfair dismissal results from a fundamental breach of contract and in the face of the breach, all of the existing contractual terms fall away. Therefore, not only is the Company faced with a very hard to defeat tribunal claim, but also the employee is free to work for their main competitors, poach customers and key staff – far from ideal.

The Employment Appeal Tribunal did give useful guidance as to when the use of a settlement agreement will be safe. Firstly, there needs to be a genuine dispute between the parties and secondly, there needs to be ‘equality of arms’. This phrase means that both parties are genuinely free to negotiate. The problems that incorrectly relying on the label ‘without prejudice’ is illustrated by another case: Billington v Michael Hunter and Sons Ltd. In that case the Appeal Court held that it was a fundamental breach of contract to invite an employee to resign on favourable terms. The employee had had some performance issues and had received a warning. Later the employer said during a meeting that it didn’t think that things would work out and told the employee that she could resign with a severance package. This was held to be constructive dismissal. The case serves to remind us that offering a settlement package to employees as an alternative to following a disciplinary process, carries the risk that, if the employee refuses the offer, he or she could resign and succeed in a claim for constructive dismissal. As the BNP Paribas case shows, being on a ‘without prejudice’ basis may not protect such discussions.

In real terms what can companies do: – let’s go back to the illustration of Mrs X. To be in the best position possible the Company should start the grievance procedure and a performance review of Mrs X (subject to there being genuine grounds to do so). Mrs X’s performance will therefore be highlighted ensuring that there is a genuine dispute between the parties. During the process Mrs X will be offered the right of accompaniment, thereby creating more of an equality of arms. The offer of a settlement agreement at this stage, therefore, is couched as a suggested resolution to the matter rather than a take it or face the consequences approach and comes under the meaning of ‘without prejudice’!

Summary

Caution must therefore be executed when offering settlement agreements, as whilst they are still invaluable instruments in the Company’s toolbox, they are also very sharp and double edged! It is best to start a disciplinary process or continue with the grievance and if possible get the employee to ask for a settlement package or only offer one when it can genuinely be said that there is a dispute between the parties.

Update - May 2010

The EAT in a case called Woodward v Santander UK plc (formerly Abbey National plc) The EAT in the form of his Honour Judge Richardson gave a judgement on 25th May 2010. The case involved arguments about whether the Mezzotero case created a wide exception to the without prejudice rule in discrimination cases. The EAT recognised that although all discrimination it said that blatant discrimination could not hide behind the without prejudice rule but that wide ranging genuine settlement discussions from which perhaps adverse discriminatory inferences could be drawn was protected by the rule. Thus this new case has become authority for the proposition that most without prejudice discussions will always been protected and that the exception referred to as 'unambiguous impropriety' will only apply in the very clearest of cases. It decided that the exception would only operate where without prejudice discussions would otherwise be allowed to hide clear and unambiguous impropriety.

Two paragraphs from the judgement are worth repeating. These are paragraphs 63 and 64:

63. It may at first sight seem unattractive, given the fact sensitive nature of discrimination cases, to exclude any evidence from which an inference of discrimination could be drawn. But it would have a substantial inhibiting effect on the ability of parties to speak freely in conducting negotiations if subsequently one or other could comb through the content of correspondence or discussions (which may have been lengthy or contentious) in order to point to equivocal words or actions in support of (or for that matter in order to defend) an inference of discrimination. Parties should be able to approach negotiations free from any concern that they will be used for evidence-gathering, or scrutinised afterwards for that purpose.

64. We therefore reject [the] submission that there ought to be a wider exception to the without prejudice rule where discrimination is alleged. We do not think such an exception is consistent with the policy behind the rule. We cannot see any workable basis for applying such an exception while preserving the parties’ freedom to speak freely in conducting negotiations.

Therefore, in conclusion, Mezzotero does not create a new rule about discrimination cases. Most without prejudice discussions can not be relied on in court or tribunal but clear and unambiguous impropriety in such communications are likely to be able to be relied on in court. For example, the EAT in Woodward referred to the following example:

"an employer in dispute with a black employee could say during discussions aimed at settlement in a meeting expressed to be being held without prejudice, “we do not want you here because you are black” and could then seek to argue that the discussions should be excluded from consideration by a Tribunal hearing a complaint of race discrimination. Such a remark would obviously fall under the umbrella of unambiguous impropriety. " and thus could be used in court.